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Senate Banking Committee Hearing on the Status of the Federal Reserve Emergency Lending Facilities

Senate Committee on Banking, Housing, and Urban Affairs

“The Status of the Federal Reserve Emergency Lending Facilities”

Wednesday, September 9, 2020

Witnesses

Opening Statements                   

Chairman Mike Crapo (R-Idaho)

In his opening statement, Crapo outlined concerns relating to the current state of the Main Street Lending and Municipal Liquidity Facilities. Specifically, he noted the observed low uptake in usage as well as the fact that the commercial real estate market lacks access to the Main Street Facility. He concluded by highlighting his July 31 letter to Secretary Mnuchin and Federal Reserve Chair Powell asking them to expand access to the Main Street programs.

Ranking Member Sherrod Brown (D-Ohio)

In his opening statement, Brown emphasized the need to focus on providing assistance to American workers and families. He called on Congress to pass additional COVID-related relief targeted at workers and the real economy, highlighting the importance of unemployment benefits in keeping working class families afloat.

Testimony

Hal Scott, President, Committee on Capital Markets Regulation

In his testimony, Scott focused on the Main Street Lending Program. He outlined his belief that American small and mid-sized businesses will require financial support for several years in order to fully recover. He continued that the Main Street Facility has fallen far short of its desired goal and lending capacity. Scott then summarized the Committee on Capital Markets Regulation’s (CCMR) recommendation that the Main Street Facility be significantly restructured to take on more credit risk by having the Federal Reserve make 100 percent of each loan. He added that these loans should also have longer maturities and loans should be made on a first come, first served basis. Scott concluded that this facility should not make loans available to businesses that can obtain market rate funding on their own and called on the Fed to reach out to the most underserved communities so they can avail themselves of this facility.

Jeffrey DeBoer, President & CEO, The Real Estate Roundtable

In his testimony, DeBoer discussed the challenges facing the commercial real estate market due to the public health crisis. He echoed Scott’s sentiment that the Main Street Lending Facility is significantly too risk-averse to respond adequately to the rapidly developing situation for Main Street businesses. DeBoer emphasized that the immediate challenges facing the Main Street program can be addressed administratively, such as revising the Small Business Administration loan eligibility rules, without the need for additional appropriations. He called on Congress to provide additional emergency rental assistance for both residential and business tenants, reasonable liability protections to ensure businesses are protected from lawsuits in the wake of the pandemic as well as establish a federal pandemic risk assurance program.

The Honorable William Spriggs, Chief Economist, AFL-CIO

In his testimony, Spriggs repeatedly outlined his belief that the spread of COVID-19, not social distancing policies, is the cause of the economic downturn. He noted the need to broaden the ability to lend to public entities. He concluded that relief efforts should focus on sustaining the ability of households to make payments in the real economy, such as rent.

Question & Answer

Main Street Access Issues

Sens. Mike Rounds (R-S.D.), Tim Scott (R-S.C) and Crapo asked for the witnesses’ opinion on the access challenges facing these facilities. Hal Scott responded that while the capital market facilities have been very successful, the Main Street Facility has not been successful because it was not designed to take on adequate amounts of credit risk and also has a variety of challenges in the general terms such as how long the loan maturity is and how long they have to pay it back. DeBoer added that banks are not incentivized to lend under this program and that the facility must be revised in order to provide such incentive and broaden eligibility. In response to a question from Rounds, Hal Scott noted that efforts to implement an updated Paycheck Protection Program should work in tandem with an improved Main Street Facility. Sen. Pat Toomey (R-Pa.) asserted that it is too early to call this facility a failure, noting that it is a good thing if private lenders have stepped in and provided the credit that is needed. He continued that the Main Street program was not designed to keep a sector afloat for years and if there is a need to do this, Congress must address whether this is the best program to do just that.

State and Local Government Assistance

In response to a question from Sen. Bob Menendez (D-N.J.), Spriggs stated that further economic damage to local businesses across the country is inevitable if state and local governments continue to lay off workers. DeBoer added that the real estate sector and state and local governments are inherently intertwined. Regarding the Municipal Liquidity Facility, Spriggs said that the maturity on those loans must be longer in order to provide states and localities adequate time to recover.

Community Development Financial Institutions (CDFIs)

Sen. Tim Scott (R-S.C.) asserted that CDFIs have a significant role to play in providing capital and liquidity to many businesses in need, especially those in the most vulnerable communities. Sens. Mark Warner (D-Va.) and Doug Jones (D-Ala.) agreed that the Fed can and should better target minority communities that have been disproportionately hit during the pandemic. Spriggs noted that the Fed has started to figure out a way to better interface with the CDFIs and that more encouragement from the Senate on this front will only benefit the economic recovery.

Direct Assistance

Sens. Jack Reed (D-R.I), Chris Van Hollen (D-Md.) and Brown asked a variety of questions about the need for direct financial support to working families. Spriggs responded that the economy will continue to face serious, and possibly greater, challenges without a renewal of unemployment benefits. He agreed with Reed’s assertion that it is important that Congress insert criteria in the next COVID-relief package that allows for unemployment benefits to continue until the unemployment rate comes down to an acceptable level. Van Hollen stated that an eviction moratorium without additional rental assistance puts tenants in an untenable situation. Sen. Jon Tester (D-Mont.) focused his questioning on rental assistance with DeBoer summarizing the variety of negative externalities if rent is not paid.

Preferred Equity Purchases

Warner and Rounds asked a variety of questions regarding preferred equity purchases, with Rounds noting that allowing the Treasury Department to buy preferred equity stakes may be particularly helpful in sectors such as hospitality and tourism. DeBoer responded with doubts as to whether there is an appetite amongst businesses to in effect give equity in their company to the government.

State and Local Tax Deduction

Sen. Tom Cotton (R-Ark.) summarized his opposition to repealing the state and local income tax deductions, asserting that it would disproportionality benefit the richest 20 percent of Americans.

For more information on this hearing, please click here.

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